NAIROBI, KENYA, JUNE 2018 — KCB Group is the most attractive bank in Kenya, latest Cytonn Investments Q1’2018 Banking Sector Report reveals.
The lender is supported by a strong franchise value and intrinsic value score, retaining a position it has held since 2015.
The franchise score measures the broad and comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential.
National Bank of Kenya ranked lowest overall, ranking last in the intrinsic value score.
The Kenyan banking sector has witnessed a challenging operating environment, following the capping of interest rates, coupled with tighter regulation.
The report, themed ‘Diversification and efficiency key to growth amidst tighter regulation. Asset quality remains a concern’, analyzed the results of the listed banks using their Quarter 1 2018 audited results so as to determine which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective
“Banks will continue to put more emphasis on alternative revenue streams to boost their Non-Funded Income and adopt an efficient operating model through alternative banking channels and digitization in order to remain profitable under the tough operating environment,” said Maurice Oduor, Cytonn’s Senior Investments Manager.
“We have looked at three key focus areas, which are regulation, diversification and asset quality in this report. With a tighter regulated environment following the capping of interest rates and adoption of IFRS 9, revenue sources diversification and asset quality management will prove to be the key growth drivers in the banking sector,” he added.
Cytonn has projected the relatively challenging operating environment for the banking sector to persist in 2018, especially with the coming into effect of IFRS 9, which takes a forward-looking approach to credit assessment.
This is likely to reduce capital positions for banks with poor asset quality as they have to set aside provisions for both the performing and non-performing loans.
“This will likely impact negatively these banks’ earnings.” said Caleb Mugendi,Senior Investment Analyst at Cytonn Investments.
“With the deteriorating asset quality, evidenced by the rising non-performing loans, we expect banks to be more prudent in loan disbursement, and consequently tightening their credit standards, in order to address the concerns around asset quality and enhance cost rationalization measures, in a bid to protect their profitability. We have seen banks adjusting their business models with lending skewed mainly towards collateralized lending,” added Mugendi.
KCB Group ranked first position on the back of a high return on average equity of 20.3 per cent compared to an industry average of 18.4 per cent, as well as an optimal loan to deposit ratio of 84.3 per cent, compared to an industry average of 76.8 per cent.
Equity Group ranked second, recording the highest return on equity at 24.7 per cent and had the best asset quality, with the lowest Non-Performing Loans ratio of 6.5 per cent compared to the industry average at 9.5 per cent.
Equity Bank’s ranking was largely pulled back by its expensive market valuation of 2.5 times, compared to an industry average of 1.6 times or KCB Group’s 1.5 times.
Diamond Trust Bank climbed three spots to Position four from Position seven in Cytonn’s financial year 2017 Banking Sector Report, owing to its good asset quality, with the bank having the second lowest gross NPL ratio at 7.1 per cent.
DTB also had good corporate governance structure, ranking second in the Cytonn Corporate Governance Index (CGI).Kenya’s listed banks recorded a 14.4 per cent growth in core EPS growth in Q1’2018, compared to a decline of 8.6 per cent in Q1’2017, and a 5-year average growth of 6.7 per cent.
Only Standard Chartered Bank and Housing Finance Group recorded declines in core EPS, registering declines of 12.5 per cent and 58.4 per cent, respectively.
Deposits grew at 9.4 per cent year-on-year, a faster rate than loans, which grew by 3.2 per cent.
The loan growth came in lower as private sector credit growth remained low at an average of 2.4 per cent, below the five-year average of 14.0 per cent, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books so as to manage the rising non-performing loans.